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Technology Sector M&A: Top Issues to Watch

Ken Kirschner

M&A deal volume in the technology sector has been on the rise through the first half of 2014¹ and a number of trends, such as consolidation and the need for scale, appear to indicate more of the same over the remainder of the year. However, countervailing forces, ranging from uncertain consumer spending to a shortage of attractive acquisition targets, could pose challenges to the upward move in the sector’s dealmaking before year-end.

“Many technology companies have been turning to M&A to respond to customer and market needs in the areas of scale, cloud services, mobility and big data, prompting stakeholders to anticipate greater deal volume,” says Ken Kirschner, partner at Deloitte & Touche LLP. In mature markets, such a semiconductors and hardware, ongoing horizontal consolidation is primarily focusing on scale, market relevance and cost structure.

Marco Sguazzin

“A number of companies are also using M&A to move into new markets, fill product and solution gaps, and accelerate research and development initiatives,” observes Marco Sguazzin, principal at Deloitte Consulting LLP. The M&A outlook in the technology sector still faces a number of headwinds, which could slow deal flow in coming months, cautions Mr. Sguazzin. “Uncertain consumer spending, declining revenue and growth rates, a shortage of attractive acquisition targets, moderate growth in the United States and overall slowed economic growth in EMEA and BRIC countries prompted some analysts to project a flat or downward trend in sector dealmaking earlier in the year. Those factors still have the potential to put a damper on technology sector M&A activity,” he notes.

A Deloitte report on technology M&A identifies the following top 10 issues impacting the sector’s M&A market this year and examines how each could impact ongoing dealmaking activity:

Growth—Enabled by a highly liquid capital market, the strongest equity market in a decade and low interest rates for well-capitalized buyers, M&A is becoming a preferred strategy to accelerate growth. Moreover, aggressive revenue targets may lead to deal-making focused on convergence and software-defined innovation to achieve growth.

Technology, media and telecommunications (TMT) convergence—Convergence, disruptive technologies and the increasing influence of digital channels are expected to continue to drive M&A activity in the technology sector. New business models that combine multiple technologies and sectors are rapidly emerging, as companies in many industries, such as medical devices and automotive manufacturing, incorporate sophisticated software into their products.

Monetizing cloud computing, mobility and big data/business analytics—Large industry incumbents investing heavily in the cloud appear to be shopping for small-to-medium-sized companies. Software-defined businesses looking to disrupt data networking and other traditionally hardware-based solutions could be dealmakers or targets. M&A targets could arise in the visual discovery, predictive analytics, and text and rich media analytics areas.²

Cross-border M&A—Faster technology adoption and greater innovation in emerging markets are leading to more cross-border M&A deals as geographic boundaries disappear amid the pursuit of market and revenue growth. An uptick in inbound M&A, with Chinese, Brazilian and, potentially, Japanese firms, buying U.S.-based companies, is also driving activity. The growing trend of “acqui-hires,” especially for smaller acquisitions, could drive more cross-border acquisitions.

Business transformation—The pace of technology change and the constant convergence of different business models across TMT appears to be prompting a buy-instead-of-build mentality. Sought-after assets may include hardware, software and the employees who develop them. Acquirers may need to scale-up their M&A capabilities as they transact larger, transformational deals, while also making smaller acquisitions that address talent and IP goals.

Divestitures—Maturation of certain technology sectors has some companies streamlining their product and services portfolios to focus on redefined “core” offerings and selling those that have become tangential. An increase in divestitures of underperforming or non-core assets seems likely, along with more rigorous preparation on the part of sellers as a way of defending value and maximizing proceeds.

Talent management—As tech companies turn to M&A to bolster their talent base, retaining, managing and developing the talent that comes with an acquisition is creating new challenges. Workforce engagement is becoming increasingly important during an integration or divestiture, particularly if a company’s core competencies reside in virtual employees.

Cyber risk—The growth in cybercrime has led to the rise of a cybersecurity market as companies look for improved solutions to help them respond to breaches. Ongoing cyberthreats may serve as drivers for security software sub-sector growth and associated M&A plays by tech firms and non-industry players seeking a foothold in this fast-growing market.

Rules and regulations—Existing and new regulations may impede large, transformational deals and complicate cross-border M&A. Increasingly active regulators have slowed some deal decision-making as technology companies have experienced the extent to which regulatory bodies can exercise their approval authority. Moreover, there could be jurisdictions where a merger may be subject to a particular country’s approval process even though neither party has a presence there.

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